Why Does AVEC Need a Rate Increase?Posted: January 21, 2020
February 2020 – Why Does AVEC Need a Rate Increase?
Ten years ago, in January 2010, the Board of Directors enacted a very substantial rate decrease of 2 cents a kilowatt-hour across the board. This represented an income reduction of $1.4 million or 6.5% of our total nonfuel revenue at that time. During the next decade, our operating results were acceptable and operating margins were relatively narrow.
In the last few years however, as weather patterns have changed throughout Alaska, we have found that our operating costs have increased while revenues have remained flat. In 2017, we experienced operating losses of $2 million and in 2018 our losses were $1 million. We expect 2019 to exhibit flat to low margins and 2020 is projected to have negative margins of close to $1 million.
Our lenders require us to have positive operating margins in most years because we must demonstrate sound business practices by having the financial resources to repay our debt obligations, including principal and interest. That is the primary reason that we build operating margins into our rates. With the expectation that we will continue to experience high operating costs, the board has directed that we begin to adjust rates by increasing the
customer charge to better reflect the fixed cost of serving each member location. With the current $5 customer charge, the service installation cost of more than $5,000 in the villages does not get recovered during the expected 30-year life of the service. As a practical matter, it would take 90 years to recover that cost. Raising the customer charge by $5 a month reduces that recovery period to 45 years, which is still too long. The board has also directed staff to perform a Cost of Service Study (COSS) to better understand how revenues are generated relative to costs in order to ensure that all classes of consumers are paying their fair share. A COSS has not been completed since the last major rate revision in 1998. The customer charge change will generate approximately $630,000 in additional annual revenue. This is about 2.5 percent of our non-fuel revenue. As most of you are aware, AVEC’s fuel efficiency and line losses are amongst the best in the state so our communities typically are still paying 10 to 15% lower rates than their non-AVEC neighbors.
I hope that this brief overview answers some of your questions.